Stormy Seas on the Atlantic

The European Union's debt crisis, the threatened collapse of its fledgling
'euro' currency, and the uncertainties created by the UK elections may seem
very far removed from the American ship of state, but, in reality, this turbulence
threatens to capsize our fragile economy.

Greece is in the most immediate danger of default, followed closely thereafter
by Portugal, Spain, and perhaps Italy. As the European Union overrides its
own treaty agreements to offer bailouts to these 'PIGS,' global financial markets
have panicked. Essentially what has happened is that the covenants and assumptions
underlying one of the bedrock reserve currencies of international finance -
and the presumed successor to the US dollar as primary reserve - have been
broken. This requires a global re-rating of purchasing power risk. The problem
is today's investors have few havens left.

The essential political model of most of the developed world has been to promise,
promise, promise, and push any costs on to the next generation. These Mediterranean
countries are starved for growth because their coddled union laborers sit around
waiting to hit age 50, so they can collect a pension that pays as much as their
working wage. It wasn't always this way, but politicians always find it safer
to add benefits than take them away. Only a taxpayer revolt can install a reformer
like Lady Thatcher or Ronald Reagan, and in Club Med, the belief is that only
suckers pay taxes.

Much as in the United States, European leaders embraced debt as the only escape.
Originally, Greece estimated its debt at some $12 billion. As the truth was
exposed, this rose to $37 billion and then to $130 billion! As Greece represents
just 2 percent of the 27-nation EU economy, it is only speculation as to how
many trillions of dollars it would take to rescue massive, ailing members like
Spain, Italy, the UK, and even France. Apparently, European politicians are
prepared to walk that road rather than face any more Molotov cocktails.

However, cowardice also has consequences at the polls. For example, a "dump
the incumbent" movement swept the recent UK elections, leaving an unlikely
coalition of Conservatives and Liberal Democrats in its wake. In a sign of
the times, the Conservatives were elected to put through budget reform, and
the Lib Dems to prevent any major spending cuts. Since the UK economy can hardly
sustain a greater tax burden, there seems to be no politically viable route
to reducing the staggering debt left over from thirteen years of Labour government.
And time is running out, as the major rating agencies have already signaled
their readiness to take away Britain's triple-A credit rating. In short, after
a brief honeymoon, the recent British election likely will continue Britain's
path to financial breakdown.

In response to the uncertainty in Europe, investors have piled into US Treasuries,
thereby driving up the US dollar in relative terms. The rush into the dollar
is akin to the passengers on the Titanic streaming towards the stern as the
ship began to sink by the bow. Although the rising aft decks offer the illusion
of relative safety, in the end, the ship's stern plunged to the ocean floor
even quicker than the bow. Only those who had secured refuge in the precious
lifeboats survived; perhaps ancestors of today's gold investors?

It's worth noting that despite low inflation, a stable dollar, and an apparent
rise in economic activity, the price of gold remains near record highs. This
seems to indicate that there is a fairly sizable minority of investors who
are not, in fact, fooled by the rising aft decks.

Meanwhile, it appears that the popular notion of US dollar safety persists
among the bulk of investors - despite all the signs pointing to an upcoming
dollar crisis. They seem to be missing two key facts: every problem facing
Europe faces America in spades, and the euro crisis is putting the dollar in
an even worse long-term position than before.

While it is troubling that the EU has chosen to risk its currency to bail
out one irresponsible member-state, the US has already done the same for several of
its states. A large part of President Obama's 'stimulus' effort involved providing
stop-gap funds for bloated and bankrupt state governments. Before investors
fled Greek debt, that country was burning through borrowed money at approximately
the same rate as California is now (as measured by the annualized deficit-to-GDP
ratio). Even after getting additional stimulus funds, the 'Golden' State was
forced to issue IOUs to its workers in lieu of pay; how long before it issues
them to its bondholders? If Washington, already trillions of dollars in debt,
bails out California, its largest and wealthiest state, how long until it defaults
too?

At least the eurozone has productive, savings-based, export-heavy economies
like Germany to counterbalance the debtors. The United States has the curse
of a common fiscal policy, meaning that we're all in the same sinking ship.
We have no strong state economy that can come to the rescue of the others,
only a Fed printing press.

As a result, we feel that this crisis has only served to create an even larger
bubble in Treasuries and the US dollar. This has allowed Washington to continue
its money printing, socialist interventions, and massive spending without immediate
consequence - and potentially set us up for an even steeper crash. All eyes
may be on the sinking euro, but there's a bigger ship on the horizon with larger
holes in its hull. If you're still on board, perhaps you should make your way
toward a lifeboat.

Please note: Opinions expressed are those of the writer.

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John Browne is the Senior Economic Consultant for Euro Pacific
Capital, Inc. Mr. Brown is a distinguished former member of Britain's Parliament
who served on the Treasury Select Committee, as Chairman of the Conservative
Small Business Committee, and as a close associate of then-Prime Minister Margaret
Thatcher. Among his many notable assignments, John served as a principal advisor
to Mrs. Thatcher's government on issues related to the Soviet Union, and was
the first to convince Thatcher of the growing stature of then Agriculture Minister
Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously
pronounced that Gorbachev was a man the West "could do business with." A graduate
of the Royal Military Academy Sandhurst, Britain's version of West Point and
retired British army major, John served as a pilot, parachutist, and communications
specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military,
John has a significant background, spanning some 37 years, in finance and business.
After graduating from the Harvard Business School, John joined the New York
firm of Morgan Stanley & Co as an investment banker. He has also worked
with such firms as Barclays Bank and Citigroup. During his career he has served
on the boards of numerous banks and international corporations, with a special
interest in venture capital. He is a frequent guest on CNBC's Kudlow & Co.
and the former editor of NewsMax Media's Financial Intelligence Report and
Moneynews.com. He holds FINRA series 7 & 63 licenses.